Magazine

Flip-Flops, Torn Jeans -- And Control

May 29, 2005

Michael S. Jeffries is a man with many obsessions: youth, fashion, himself, his lucky shoes. Those preoccupations and quirks have come to define the way he runs Abercrombie & Fitch Co. (ANF), the clothing company best known for its rebellious attitude. Headquarters is set within 300 wooded acres in New Albany, Ohio. A bonfire burns daily amid the tin-roofed buildings, where dance music blares nonstop. Jeffries doesn't have an office or desk; he works from a conference room with big windows looking out on the grounds. No matter the weather, he trots around the place in flip-flops, torn jeans, or shorts. Most mornings he lifts weights barefoot in the company gym. At home, a photo of a toned naked male torso shot by Herb Ritts hangs over the fireplace in his bedroom. And at 60, he dyes his hair blond "because it is fun," he says. A former colleague, Neil Dinerman, puts it a little differently: "He would like to be a guy with a young body in California."

Few in the apparel business have achieved as much success by flouting convention. Since Jeffries became CEO in 1992, he has transformed a floundering men's haberdashery once owned by Limited Brands Inc. (LTD.) into a brand so popular that the company has posted profit gains for the past 48 quarters (excluding a one-time charge last year). That's a record unmatched by its peers. Jeffries revived A&F by selling preppy but edgy casual clothing at high prices unheard of in that market. He used advertising so racy that it drew complaints from parents, which of course made the clothes even more appealing to kids. Jeffries also faced more serious complaints of racial discrimination in the workplace; last year A&F paid about $50 million to settle three lawsuits.

At the end of the decade, A&F lost some of its cachet; for four years sales declined at stores open at least 12 months. But Jeffries took a different approach from most retailers. He refused to offer discounts and, to howls from Wall Street analysts, actually raised prices to preserve the allure of the brand and profits. His strategy worked: Since last fall, A&F's sales have rebounded, and its stock price has climbed 111%, to about $58. The $2.6 billion company said that during its first quarter, which ended Apr. 30, its net income rose 38%, to $40.4 million, from the same period last year. Sales at stores open at least a year rose 19%.

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Recently, though, Jeffries has had to face the new reality confronting all CEOs. On Apr. 12 the company quickly settled a shareholder suit by reducing Jeffries' stratospheric pay package; among other things, it agreed to cut in half a $12 million bonus he would receive for staying on as CEO through 2008. The suit also drew attention to A&F's cozy board. BusinessWeek has since learned of an undisclosed, though not illegal, transaction involving the director of the compensation committee and A&F. It's not just questions of corporate governance that have some concerned, though. "Abercrombie's biggest weakness is that it is all about Mike," says A.G. Edwards & Sons (AGE) analyst Robert Buchanan.

Employees are reminded of that at the start of each day. Jeffries leaves his black Porsche -- doors unlocked, with the keys between the seats -- at the same odd angle at the edge of the parking lot. Everyone knows why: Jeffries is superstitious about success. That's why he always goes through revolving doors twice. Associates have learned not to pass him in stairwells; he returns the courtesy. Then there are Jeffries' lucky shoes, a worn pair of Italian loafers that a secretary keeps in her desk. "I put them on every single morning when I look at the numbers," he says. Several years ago, a piece of one sole fell off, sparking a headquarters-wide search.

Jeffries was born into retail. His father, the owner of a small chain of party-supply stores in Los Angeles, let him select all the merchandise for the toy departments when Jeffries was just 12. He studied economics at Claremont McKenna College and got an MBA at Columbia University. In 1968 he joined the management training program at the now-defunct New York department store Abraham & Straus, which was a division of Federated Department Stores Inc. (FD) and the training ground for some of the nation's best merchants. Those who worked at A&S during that time included Allen Questrom, who went on to run Federated and J.C. Penney Co., (JCP) and Millard S. Drexler, who was CEO of Gap Inc. (GPS)and now is at J. Crew. Even among that group, Jeffries was known for his ambition. "He worked twice as much as any of us," Drexler says. Former A&S Chairman Alan Gilman remembers something else: Jeffries was so in control that he failed to develop his staff. "A gifted guy who does it himself is different from a gifted guy who helps people help him do it," Gilman says.

When Jeffries ventured out on his own, he had some trouble. In 1980 he founded Alcott & Andrews, which was aimed at career women. The brand did well initially, but Jeffries overexpanded. By 1983, Alcott was bankrupt. Next, Jeffries took a top merchandising job at Paul Harris, a struggling Midwest women's chain that slipped into bankruptcy protection not long after he arrived. Thomas Yeo, another merchant at Harris, said Jeffries was creative but never made much effort to fit in. "He kind of looked down on all the people around," Yeo says. "He looked like he was listening to you, but I don't think he ever was."

None of that prevented Limited CEO Leslie Wexner from hiring Jeffries to reinvent the ailing Abercrombie. Jeffries' big idea was to make the new A&F sizzle with sex: Bruce Weber photos of scantily clad models dominate the walls of A&F stores and its catalogues. Weber says Jeffries interviews everyone used in his shots. Jeffries' control of the brand goes way beyond imagery, though. To this day, there's no detail that he doesn't approve, from all merchandise at A&F and the three other labels he has developed to how clothes are folded on store tables.

Jeffries hasn't paid the same attention to corporate governance, even as its importance to investors has grown. The suit challenging his pay noted that lax attitude. As part of the agreement, in which A&F didn't admit any wrongdoing, Jeffries cut his bonus, gave up option grants in 2005 and 2006, and delayed the vesting of a $28 million restricted share award until one year after he retires. A&F also agreed to add more independent directors; of its six outside directors, two get substantial fees from doing business with the retailer, A&F discloses.

Jeffries says the company settled so that he wouldn't be distracted by the suit. But William S. Lerach, a San Diego lawyer who specializes in shareholder suits, says the settlement is unusual because the case was of a type that is hard to win. He wonders whether Abercrombie settled to prevent a closer look at its books -- a notion A&F denies.

Still, until recently, Jeffries has been rather casual about the independence of his board. The head of the compensation committee, John W. Kessler, has been involved in a deal with A&F, and his son-in-law, Thomas D. Lennox, holds a powerful position at the company as head of investor relations. Kessler is also chairman of New Albany Co., a real estate development firm owned by Wexner. Kessler told BusinessWeek that New Albany sold Abercrombie the piece of land for its headquarters in 1999, the year after A&F was spun off from Limited; real estate filings show the price was $12 million. Kessler also received a fee from Abercrombie for being part of a three-person team charged with finding the site. Lennox says both transactions were approved by the board, though not disclosed to shareholders, and calls the fee "immaterial," though he couldn't say how much it amounted to.

While some legal experts point to technical reasons for not mentioning the conflicts, they also say it violates the spirit of disclosure rules. "What makes it so bad is that the chairman of the compensation committee is someone the CEO has an interest in having on his side," says Randall S. Thomas, a securities professor at Vanderbilt University School of Law.

What does Jeffries say about this deal? "The bottom line is nobody thought about it," he says. "Were there some oversights? Yeah. Have they been corrected? Yeah."

What Jeffries is really focused on is continuing to expand Abercrombie. He recently launched Ruehl No. 925, an even higher-end label for those who have outgrown A&F. That's in addition to A&F's kids' line and Hollister Co., for mid-teens. He says he's developing a fifth concept, but won't give any details. This year the company, with 783 stores, will enter Canada, and next it will head overseas. Jeffries imagines a global portfolio of luxury brands -- something he underscored a year ago, when he hired former Gucci Group (GUCG) executive Robert Singer as president. Now Jeffries says he is looking for a successor and has named presidents for each retail division.

But during a meeting to review the company's knitwear lineup for fall, it's clear that day is far off. Jeffries solicits opinions from the 45 merchants and designers, then critiques their responses, and makes the final decision on every item. "This shouts sex," Jeffries hoots about a silk and cashmere top for Ruehl. This is definitely still all about Mike.